Segmentation --- Understnading Customers and Markets

Wholesale distributors must create and use formal methods to gather customer feedback and improve communication. Best Practice companies have a source of information about what customers think of them that does not come from their sales people. Sales people make stuff up; sorry, they do. Sales people do provide information and that is fine. You need to listen to your sales force. There is no question about that, but Best Practice companies have a way of getting input directly from customers:

What do you think of us?

How are we doing?

What are the practices that our competitors provide to you that you really value?

There is a way of gathering that information that does not come from the sales force. Some firms use consultants who do studies on customer satisfaction. This is a single event and it goes away. Best Practice says you build a process and gather data. Maybe it is only quarterly, but you then have something to measure every quarter. What is getting better? Is something getting worse? You must build an ongoing process that gathers data. The way you turn that into a process is to institutionalize the process so that it is done every quarter or every 6 months. The second thing that you need to do is to have somebody, other then a sales person, write down a summary of what key messages were heard. A suggested format is to create 5 key questions that you ask every one of the selected customers to rate you on a scale of 1- 10. This will provide guideposts to be able to pull that together. If you ask 100 customers you will get a statistically better answer.

Segmentation

The other big thing we need to know about to understand markets and customers is segmentation. Segmentation is the act of dividing, separating or partitioning to define specific needs of customers and markets. Segmenting provides the intelligence that defines the various reasons why customers buy from us. It can help us determine the types of customers we should be targeting and the service output demands we must be able to provide to gain market share. Segmenting customers is essential to growth and profitability.

Many distributors build their business around geography instead of building it around customers. Distribution has outgrown that concept. You must segment your markets, but do not segment by small, medium and large and allocate suck up behavior based on size. That has been the typical methodology. Segmenting by customers means you differentiate based on their service output demands. What are their expectations? What business are they in?

There might be several segments within each classification. If you have dealers as customers, you may have several segments of dealers. You might have a dealer segment that you enjoy the vast majority of their purchase and you are their primary supplier. You might have a segment of dealers where you are tertiary and they are buying from every Tom, Dick and Harry and the business is won by whomever has the best price. You may also segment professionals such as architects, engineers and institutions. You might have another segment that is based on governmental purchases, federal, city or state. The point is that you group your customers and it has nothing to do with geography. Within each segment the customers are very similar with very similar service output demands and the segments themselves have as many differences as possible. That may sound a little fuzzy, but if you had a solid customer segmentation process, you may end up with between 5 to 10 customer segments. Why are they segmented? Because those customers consume products differently, they have different needs in the market place, different demands.

Once you complete the segmentation process then you can refine your product strategy. ,

: “If you want to boil all this marketing intelligence down and not take the class, think STP. Remember the oil additive Andy Granitelli pitched for years. The STP of marketing is Segmenting, Targeting and Positioning. ”

If you are going to really understand customers you have got to do all three. It is not just the products that are in the box. It includes your own value proposition. You need to take properly positioned products and align them to targeted market segments.

As an example, you might decide on the dealer segment where they buy a lot from your company, you are willing to invest money and provide a high level of service to those people. For the clients that buy from everybody based strictly on price, you might decide that is a segment, but you decide not to target it because it is not productive and doesn’t provide an adequate return. There is a high cost to serve, but you cannot have those discussions without understanding your customers. Volume alone is absolutely not a preferred criterion. If you look at volume all you know is what they are purchasing from you and you are never sure if that is 100% of their purchase or is that 50% of their purchases.

If you are going to be effective at marketing you must create a flow of information. How do I develop market insight? How do I get to know this? The answer is ”ask the customers. ”. CEO’s or Vice Presidents having a conversation with each other will generate rich qualitative data. That is the best way, but unfortunately senior executives have day jobs, other demanding responsibilities. The things that give you the next highest validity in terms of market insight are personal conversations between other professional peers, CFO to CFO , General Manager to General Manager or Purchasing to Purchasing.

An alternative to direct communication channels is putting together market focus groups, but don’t have your sales guys go out and do focus groups. It is like rearranging the deck chairs on the Titanic. It is just not going to work, because they are going to be selling and as soon as you put customers in front of a sales person they act differently because they are in front of a salesman. But, if all of a sudden Jody is sitting down with a bunch of customers and she says, “I am the executive of XYZ company” and it is clear from the beginning that she is not selling them something, but talking about industry issues, the tone of that conversation is more productive than a sales person could achieve. I am not taking anything away from sales people, but once you are in that role, everybody sort of puts on their buyer’s hat. You can also use a consultant to facilitate these focus groups.

Telephone surveys drop validity way down and are not recommended. A written survey gives you some insight, but nowhere near as much as the personal conversations or focus groups.

Reach out to your customers to better understand your markets and their demands. It can provide tremendous value and provide a different insight into your business. It helps you define specific best practice as it applies to success in your company.

Dr. Rick Johnson (rick@ceostrategist.com) is the founder of CEO Strategist LLC. an experienced based firm specializing in leadership for wholesale distribution. CEO Strategist LLC. works in an advisory capacity with company executives in board representation, executive coaching, team coaching and education and training to make the changes necessary to create or maintain competitive advantage. You can contact them by calling 352-750-0868, or visit http://www.ceostrategist.com for more information.

Rick received an MBA from Keller Graduate School in Chicago, Illinois and a Bachelor's degree in Operations Management from Capital University, Columbus Ohio. Rick recently completed his dissertation on Strategic Leadership and received his Ph. D. He’s also a published book author with four titles to his credit: “The Toolkit for Improved Business Performance in Distribution, ” the NWFA & NAFCD “Roadmap”, Lone Wolf-Lead Wolf—The Evolution of Sales” and a fiction novel “Shattered Innocence. ” Rick’s next book due in November is titled; Lone Wolf – LEad Wolf The Evolution of Leadership